TEXTILE EXPORTS GROWTH SLOWING

MARIAM NASIR
Manager Research

Aug 27 - Sep 02, 2007

Pakistan's textile exports have taken a sudden turn for the worse after two years into the post quota regime. Textile exports managed to increase at a very decent growth of 16% in FY06 (compared to a historical five-year average annual growth rate of 11%). However the same in FY07 started on a low note but took a leap off after government announced subsidy package to the industry. Textile export share in the total export of Pakistan has declined from 67% in FY97 to 62% in FY07. This slow growth in the textile exports can be attributed to heating up of competition from the likes of China, India, Bangladesh and Turkey, higher cost of doing business owing to a hike in interest rates, higher cotton and gas prices and industry fragmentation which has resulted in strong price competition and inability to pass on the higher costs. Pakistan has begun to lose share in the US bed wear import market to both India and China. Rising domestic costs and resultant product price hikes are leading to lower demand. In the meantime, Pakistan's bed wear exports to the EU remain hampered by a 6.1% anti-dumping duty and non-inclusion of Pakistan in preferential access schemes. The situation has been further aggravated by capacity expansion in India.

FACTORS CONTRIBUTING TO THE DECLINE

The demands of free trade markets, without the safety blanket of pre-determined market share, are playing up. Apart from that there is interplay of factors at hand here include lack of economies of scale and domestic cost pinch. Large scale of production allows lower fixed costs and competitive pricing in undifferentiated products (yarn, fabric). While Pakistan's industry has invested substantially in capacity expansion (US$6bn over the past five years), the industry remains fragmented and only a handful of manufacturers have the requisite size to compete with Indian and Chinese manufacturers' scale of production. Pakistan has been facing strong price competition where it lacks the scale advantage. Meanwhile, fewer resources are dedicated to higher value add products which demand premium prices on account of design, etc. Note that companies with higher value add products have fared remarkably better than peers. Apart from that higher cost of doing business is putting a burner on the financials of the companies. Through the dual forces of higher inflation and a tight monetary policy the interest rates have hiked as well. Higher cotton and power generation costs and a 53% hike in minimum wage rates over the past two years are also shrinking the margins of the companies. The impact of stepped up financial charges on the heavily leveraged industry coming off a three-year expansion spree have had the greatest impact on textile sector profitability.

STATE BANK'S ROLE IN TEXTILE INDUSTRY'S DEVELOPMENT

The State Bank of Pakistan has consistently lent a helping hand to the textile industry due to its strategic significance and contribution to the overall industrial output, exports and employment generation. In the post-quota regime, the State Bank's support for the textile industry has been extensive and substantive recognizing the intense international competition faced by the industry. Latest SBP exchange figures indicate that textile exports for July-March FY07 have grown by 10.3%. While in the first few months of FY07 textile exports grew somewhat slowly, it seems to have gained momentum in the last 5 months when the average growth recorded was 11.63%. The composition of exports reflects that exports of yarn, knitwear, towels, synthetic textiles and made-up articles have picked up but few other categories such as cotton cloth, bed wear, and ready-made garments are growing slowly. At the start of FY07, based on the suggestions from different textile bodies, the State Bank agreed to provide higher level of interest rate subsidy on export financing and long-term financing for exports. Currently, the financing facilities to exporters under the Export Finance Scheme (EFS) are being offered for a six-month period at 7.5% which is around 3% below six month Karachi Inter Bank Offered Rate (KIBOR), and facilities for import of eligible machinery for a period of up to 3 years under SBP's Scheme for Long Term Financing for Export Oriented Projects (LTF-EOP) are being offered to exporters in the range of 5% below the KIBOR of relevant maturities. Similarly, financing facilities under LTF-EOP for up to 7-1/2 years are available to exporters at 7.0%. Total gross disbursement from refinancing facility allowed to banks during July 2006 to April 21, 2007 under EFS and LTF-EOP is estimated to be Rs 328 billion of which EFS flows were Rs 284 billion. State Bank's support for textile industry has been extensive and substantive over the last many years. In regular interface with the International Financial Institutions and other stakeholders, SBP has been regularly advocating for improved market access in the United States and Europe. The SBP has been closely following issues of the industry with the commercial banks and within the macroeconomic and fiscal limitations, the funding provided for the textile sector has been large and significant.

US$BN

TEXTILE EXPORT

PAKISTAN EXPORT

% OF PAK. EXPORT

FY97

5.55

8.32

66.76%

FY98

5.52

8.63

64.01%

FY99

4.97

7.78

63.93%

FY00

5.59

8.57

65.22%

FY01

5.79

9.20

62.93%

FY02

5.79

9.13

63.35%

FY03

7.20

11.16

64.52%

FY04

8.04

12.31

65.29%

FY05

8.56

14.39

59.48%

FY06

9.93

16.45

60.36%

FY07

10.76

17.12

62.84%